Last week, Citron Research issued a report on World Acceptance Corporation (NASDAQ:WRLD) that demonstrated a staggering degree of either ignorance or malfeasance. Their tabloid-style reporting seems designed to maximize fear in stockholders. One could reasonably assume it is because Citron is short the stock. They claim there is a disconnect between reality and what World presents to investors. The truth is there is a huge disconnect between reality and what Citron presents to readers.
Setting aside the outrageous accusations of World Acceptance being a "borderline-legal Ponzi scheme", Citron either doesn't understand installment loans, or is manipulating the truth to their own ends. Installment lenders exist because the old finance companies like Beneficial are gone. They serve the market of folks who need to borrow about a thousand bucks, and want to be able to repay it over a long period of time. With installment loans, customers can borrow more than with a payday loan, and take much longer to repay it. It hardly "takes advantage of society's most vulnerable". If anything, it give these folks access to credit they cannot get anywhere else. Since the loans are unsecured, they naturally carry higher rates and fees.
Parsing the Report
"Dirty Secret #1: Loan Flipping". Citron claims that 80% of the business model runs on "loan flipping". The actual number is 73.3%. The loans World originated in fiscal 2008 averaged $959 for a term of eleven months. And yes, the company admits that it – GASP – "actively encourages customers to refinance existing loans, increasing the amounts borrowed and fees paid".
“Ponzi scheme”? Hardly. If customers have made a few months payments and decide they want to extend that loan, what’s wrong with refinancing it? They pay for the privilege of extending it and, if they choose, add those fees to the principal. There's nothing illegal, immoral or unethical about it. The company’s been doing it for 45 years. If customers didn't find the terms attractive, they'd have moved on long ago.
Next: After sifting through the usual moralizing, we get to Citron's "penetrating question". Note the phraseology -- the actual question exists in the first two clauses, the rest is just inflammatory claptrap:
What is the real value of a loan book comprised of appx. 700,000 unsecured loans averaging $800, owed by borrowers who have been flipped multiple times, have already paid MORE than their fair share of interest, who have been exposed to intense collection harassment as documented in class-action lawsuits, and whose total payments have already far exceeded the principal…..but still owe more than they ever borrowed?
I'll tell you the real value. It's worth a lot, and always has been. Check out World's 1997 10-K. Back then, refinancings were 91% of their business. Here we are 12 years later and they're going strong – with less dependence on refinancings as they diversify their product line.
This is similar to the criticism leveled at payday lenders, like First Cash Financial Services (NASDAQ:FCFS), Advance America (NYSE:AEA), Cash America (NYSE:CSH), Dollar Financial (NASDAQ:DLLR), QC Holdings (NASDAQ:QCCO), and EZCorp (NASDAQ:EZPW). As I've written many times, it's easy to attack these companies with inflammatory accusations.
On to "Dirty Secret #2: The Face of Installment Loans[sic] Victims". The one case cited by Citron is just that – one case. This is what logicians call the "blanket generalization" and "emotional appeal". If you actually read the recap, you'll find World is barely mentioned in the periphery of this unfortunate situation. But if you are foolish enough to believe that this is either representative of World's business practices, or more than a random occurrence, then you're falling for Citron's short-selling snake oil.
Regarding Citron's claim of "at least two ominous and previously-undisclosed consumer class action lawsuits", these appear to be outright lies. There are no such class action lawsuits against World that have been filed that I can find. None. Anywhere. That should be another tip to readers about Citron's motives. I call on Citron to cite those lawsuits.
They do cite a New Mexico case, in which the state supreme court found that World's arbitration agreement was found to be void and unenforceable. That's all that the court found. It did not find that World's loan provisions were void – only the arbitration agreement. While that will require World to change how they resolve disputes, any class action that seeks to take advantage of this decision will have little value because there are no easily-proven damages. The best-case scenario is for a plaintiff to file a complaint regarding the loan provisions, and that they were dissuaded from pursuing a complaint because they could only go to arbitration.
Even then, the defense is simple – the client could still have gone to arbitration and may have prevailed. Not allowing them to sue wouldn't have necessarily changed the outcome. So what damages are there? None, in my opinion.
Apparently. World isn't worried, either. The company discloses in its filings that:
[F]rom time to time the Company is involved in routine litigation relating to claims arising out of its operations in the normal course of business. The Company believes that it is not presently a party to any such pending legal proceedings that would have a material adverse effect on its financial condition.
Give the penalties associated with false statements in company filings since Sarbanes-Oxley, I don't think World would be inclined to publish a statement it couldn't stand behind.
Now, if World's debt collection practices violate the law, then it should pay the consequences. Even assuming they were convicted of violating debt collection laws or settled out of court, would be unlikely to cost them much – certainly not enough to put much of a dent in their business.
More of the Same
Next, "Dirty Secret #3: The Company Itself Fears the End is Near". Citron infers that game-changing regulatory protections are in the works that would kill World, and that even World itself admits that such regulation would kill them.
The legislation that Citron will discuss is unlikely to pass, at the present time and in this economic environment. But I'll wait for the next part of their series to debunk that claim, after they supply specifics.
In short, however, of course a company will say that proposed regulation will harm its ability to stay in business. It's probably true. It wants to muster support for its side of the story, and it can't do that unless it demonstrates the seriousness of it.
An old high school teacher of mine was fond of quoting famous people. He often spoke of Gertrude Stein, famous for saying, 'There is no there, there". I believe that is exactly the case with Citron's research report. Of course, investors are advised to do their own due diligence. As for me, just prior to writing this article, I went long World because of its fundamentals, which I'll discuss going forward.
In the meantime -- Citron, I'm watching you.
Full Disclosure: At the time of writing, long WRLD, short May puts of EZPW and FCFS.